We're all told how important it is to save but do we really know how to save? This may seem a silly question but think about - who taught you about saving and what did you learn? How good are you now with savings and investments? Would you like things to be better - would you like more money in the bank and the investment portfolio? I certainly would but I think I'd always answer that way!
For many of us there's never really been a clear explanation of the different types of savings and how to go about saving effectively.
The very basics are very straight forward - regularly put money aside into a separate savings account because the power of regularly adding something to the pool of it means it grows really well. It is part of the power of habits - things done regularly have a strong accumulative effect. When you add money to a savings account each pay and look at the balance on your birthday you'll be giving yourself your very own joyful birthday present!
There are three basic types of savings that make a difference in life:
1. Short term goals like holidays, cars, weddings and computers
This is a great place to start saving because you get to enjoy the reward for the effort reasonably quickly and learn that it isn't as difficult as it initially seems. Saving for a holiday or any other short term goal can be done by putting away a fairly small amount each month (or weekly or fortnightly - depending on how you're paid). You figure out your budget for the holiday, divide that by the amount you can save per pay period and that's how long it takes to save enough money to achieve your short term goal.
If you don't have a short term goal in mind initially you can simply put money aside to enjoy watching it grow and when you do decide on what you want to do with it you already have a good amount of money to do what you want.
As a starting point putting away $50 per week adds up really quickly over a year 52 weeks x $50 = $2600 per year, then add interest.
From there you can add extra cash as you go to help it grow faster. You can let friends and family know that you're saving for a specific purpose so if they are comfortable they can give you cash for birthdays and Christmas (just remember some people don't like giving money as a present, they prefer tangible gifts).
2. Major Life Investments and Expenses like investment portfolios and the family home
Getting the money together to start a long term investment or the deposit for the family home is another type of saving. It takes longer to achieve generally because you are working towards a larger sum of money. It can be done in conjunction with short term saving goals and is often done with a separate savings and investment account.
This type of savings can be in cash accounts, term deposits, managed funds and savings accounts (more about these later).
This can be used to create the investments that create money for you so it is the precursor to the wealth creation type savings and investments.
3. Wealth creation for long term financial security and freedom
These are the savings that can include your superannuation, property portfolios, share investment strategies, government bonds and managed funds. These are long term investments for long term results. They are generally fairly slow to liquidate so the money within them isn't quickly accessible.
The aim for these investments is to generate an income, either immediately or in the longer term such as superannuation for retirement. Ideally building these income generating investments as soon as possible in life will generate a passion income (where it earns money without you actively working for it) so you can reinvest the funds or live off them.
This is where money makes money, a delightful thing.
How to Save
As Robert Kiyosaki from Rich Dad, Poor Dad fame, advises, pay yourself first. Put money away for your saving goals and then spend money on your monthly expenses. To Robert Kiyosaki paying yourself first is about investments and savings are investments.
There are different types of savings and investment accounts to help you achieve your savings goals. Banks and credit unions offer cash accounts, term deposits, managed funds and savings accounts. Be careful with many of the savings and cash accounts offered by the Commonwealth Bank, National Australia Bank, ANZ, Westpac and St George as they are usually setup to pay you as little interest as possible. They tier the payment of interest so you only receive interest payments on someone of the money, some of the time. These bank accounts are part of the reason these banks make big profits because they take your money and invest it so they make money on all of it while only paying you a smaller interest rate on some of the money - your money.
Look for banks and credit unions that offer savings and cash accounts that pay you interest on ALL the money in the account ALL the time. I've found some of the credit unions to be particularly good with their savings accounts - paying a good interest rate and rewarding you for regular deposits. Credit Unions are usually more member focused than dividend focused. So it is worth looking around and seeing who can offer you an account that suits your needs best.
The big banks tend to rely on customers sticking with them out of loyalty and lack of knowledge, time or effort and they actually base the structure of their savings accounts on the belief their customers won't look around, believing they'll be looked after 'by their bank'.
Term deposits are where you put a chunk of money away for a set amount of time for a set amount of interest. The best term deposits are the ones that pay you a good rate of interest on ALL the money in the account, not just on some of the money in the account. There are usually penalties for taking money out of a term deposit before it is due to mature so be aware of these costs.
Regularly putting money away to achieve your goals and dreams is a really empowering habit to develop. It is from little things that big things grow and now is the best time to plant a seed for your next dream. Just think how quickly last year went and what a difference it would make to next year to have a healthier savings balance.